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Is mortgage insurance the real hindrance to switching loans?

With all the attention focused on banks and their exit fees being the reason switching is difficult, the real culprit has virtually gone by unnoticed.

Mortgage insurance, or lender’s mortgage insurance (LMI) as it is known, is often the most prohibitive factor in stopping people from switching between lenders.

Aussie’s founder and executive chairman John Symond said homeowners who borrow more than 80 per cent of the value of their property are subject to LMI, which insures the lender – not themselves – should there be a default on the loan.

“When you take your loan away from one lender, the mortgage insurance contract ends,” he said. “You then have to take it out again when you sign up with another lender, so you’ve effectively been hit with it twice.”

“LMI can run into thousands and thousands of dollars, and that’s the real reason why it can be difficult to switch lenders – particularly when you’ve borrowed more than 80 per cent of the loan.”

Mr Symond said the attention focused on exit fees has been misguided.

“There are costs involved to lenders when setting up loans which include property valuations and the drafting of loan documents, which are often completed by a lawyer,” he said.

“Instead of charging for this upfront, banks absorb it into the life of a loan and if you decide to exit early that’s when you’re charged these fees.

Mr Symond said these costs have to be recouped somehow, so abolishing exit fees may mean they are charged to the customer in another way – such as higher interest rates.

“Abolishing exit fees won’t be the game-changer that many think it will be.”

About Jim Rice

Jim hails from California but now calls Sydney's Inner West his home. He is passionate about learning and teaching both digital technology and personal finance. In his spare time you'll find him either chasing his daughter around town or in the surf.

Kerri

John – you state “when you take your loan away from one lender…” does this mean that if I refinance with the same lender (debt consolidation at the end of a fixed interest period) that I should not have to pay a second amount of LMI? By the way – my current lender is Aussie,

That would depend how a lender applies their own rules around the requirement for LMI to be paid on the ‘new loan’ based on your LVR. Refinancing, even with the same lender, could be seen as paying off your existing loan and settling on a new one, so you may have to pay a second amount of LMI. The cost of LMI can be a hinderance to refinance, but exists to protect the lender when lending a significant percentage of the value of the security (the property). It’s important to factor this in when considering a refi.

There are strict regulations about what can be discussed about someone’s personal situation, especially over a forum such as this, so if you are considering refinancing it would be worthwhile speaking to an accredited mortgage broker. One of our brokers would be able to check if any of the lenders on our panel – which includes Aussie – could get you a better deal based on your personal situation.

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